Thursday, August 3, 2017

Sri Lanka’s Hambantota port is officially China’s own port, for 99 years. That’s according to a landmark agreement signed early last week, which gives China Merchants Ports Holdings—an arm of the Chinese government--70 percent stake in the Indian Ocean’s prominent outpost.

The Hambantota port expansion begun with loans from China. But when Shri Lanka could not pay back the loans, Beijing converted these loans to equity, in essence turning Sri Lanka into a "semi-colony," as was the case with China’s own Southern ports after she lost a war with European powers--though in a subtle way.

The taking over of Hambantota by Beijing is bad news for both Pakistan and India -- for different reasons.

For Pakistan, the deal will serve as a model for the futureof CPEC (China–Pakistan Economic Corridor), a huge transportation network connecting China to the Arabian Sea at Pakistan’s Gwadar Port. Like Hambantota, CPEC started with loans that will eventually be converted into equity, as it seems very unlikely Pakistan will ever be in a position to pay them back. This means that Beijing will one day own CPEC, and collect tolls from every vehicle that makes use of it.

For New Delhi, the Hambantota deal is bad news because it’s one more step to encircle and pacify India by Beijing. China’s enormous investment in CPEC, and port infrastructure in the Indian Ocean, serves much more than trade. It advances Beijing’s “String of Pearls” strategy, as well as its unofficial agenda to encircle India through its arch-rival, Pakistan.

To be fair, the Hambantota port will make it easier for India to trade with Sri Lanka. But it could also be used as a naval station for China should the two countries ever engage in a full-scale war.

That could explain India’s efforts to contain China’s Indian Ocean agenda by forming alliances with US and Japan, and by performing a joint naval exercise in the Malabar in the Bay of Bengal last July.

Still, the prospect of a Pakistan debt problem or an open confrontation between India and China are very unlikely, at least for the time being. That’s why investors in the region have chosen to focus more on market fundamentals rather than on the geopolitics of the region, driving shares in all three country markets higher recently.

But that could change, if tensions between China and India’s new allies, America and Japan, continue to flare.